Did you know that gold was the star asset class for investors?

The general feeling is that gold tends to be a staid asset class that tends to appreciate once in a blue moon. Is that really the case? Let’s check.

July 20, 2020 8:40 IST | India Infoline News Service
When we talk of asset classes, gold is more a peripheral hedge than a distinct asset class. The general feeling is that gold tends to be a staid asset class that tends to appreciate once in a blue moon. Is that really the case? We can get a clearer idea by looking at the performance of asset classes over different time frames. We will use 1 year as a proxy for short term, 3 years for short to medium term and 5 years for a medium to long term.

How asset classes performed in the last 1 year

To avoid any period bias, we have considered June 30th (end of H1) as the cut-off date for this calculation. The chart below captures the performance of five important asset classes over the last one year on a point-to-point basis.

Data Source: NSE, RBI, Value Research

Between July 2019 and June 2020, equities were clearly under pressure. The fall was specifically sharp in 2020 with most of the damage happening between January and March 2020 after COVID became a pandemic. It ensured that the index and equity funds gave deeply negative returns. We have considered the Sensex as a proxy for passive investing and equity funds as a proxy for active investing.

Debt has been relatively stable during the last one year with debt funds marginally outperforming bank FDs, albeit with a higher degree of risk. However, if you compare them in post-tax terms, debt funds would have an edge over bank FDs as they can structure more tax-efficiently via SWPs. But the clear leader in the last one year has been gold that gained over 23% in the midst of global and domestic uncertainty. With uncertainty over equities and equity funds, as well doubts over an economic revival, investor demand gravitated towards gold as a safe haven.

How asset classes fared over a 3-year period

You can argue that 1 year may be too short a time frame to evaluate long term assets, so we also look at a medium term view of 3 years. This is likely to reduce the impact of the last one year on returns. Check the chart below.

Data Source: NSE, RBI, Value Research

There is a clear disconnect between the returns on Sensex and equity funds. Why did this happen?Mutual funds faced the problem of Kurtosis. It means that Sensex returns were driven over the last 3 years by a handful of stocks like TCS, HDFC Bank, Reliance, Hindustan Unilever, etc. Typically, mutual funds have restrictions on how much they can allocate to each stock. Even if MFs could see the kurtosis trend, they were not allowed to concentrate their holdings only in high performing stocks for the sake of risk diversification.This kurtosis was sharp in the last 3 years and led to passive strategies outperforming active strategies.

Debt funds have done exceedingly well at 7.98% outperforming bank FD by 138 bps over 3 years. However, this gap would widen if you consider the impact of taxes. The consistently dovish stance of RBI led to a fall in bond yields, pushing up bond prices in the process. But the star performer was still gold, which gave a CAGR return of 13.49% over last 3 years. The uncertainty with respect to sanctions on Iran, the US-China trade war, uncertainty over the IL&FS fiasco and later COVID-19 led to another outperformance by gold.

How asset classes fared over a 5-year period

Equity as an asset class continued to be under pressure compared to debt and gold over the last 5-year period, as can be seen from the chart below.

Data Source: NSE, RBI, Value Research

While kurtosis continues to be a challenge for equity funds, even indices were under strain as the market valuations had always run ahead of earnings. Through most of the last 5 years, earnings did not live up to expectations and that led to bouts of volatility in equities.This undermined the performance of equities as an asset class. The falling interest rate regime since 2015 ensured solid returns on debt funds even as bank FDs also offered attractive returns over last five years. But the best performer, once again, over the last five years has been gold. In a way, gold bottomed around $1050/oz in 2015 around the time the US started hiking the Fed rates. Since then, gold has continued to be a safe haven and in the last one year, gold has been a super performer due to consistent debasing of currencies by global central banks.

In short, gold has been the surprise package of the last five years. That is food for thought for any investor or financial planner allocating long term funds for investors. Gold may still not be an investment class, but a hedge oriented allocation to gold is inevitable.

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